By: Omar Khattaly
Researcher & Consultant on MENA Political Economy and Sovereign Wealth Funds
Even though the first thoughts that come to many when hearing the words “state-owned” next to “economic recovery” are socialism, government control and bureaucracy, according to accounting firm PwC, the proportion of State-owned Enterprises (SOEs) among the Fortune Global 500 grew from 9% in 2005 to 23% in 2014. One can only pause and wonder why government-owned companies have been on the rise and have enjoyed such success across all continents with no exceptions. That leads us to the questions: What are these SOEs, why have governments’ appetites for them increased, and what role can they play in sustaining domestic economic growth and in helping to contribute to societal value creation in post-conflict areas such as Libya, Yemen, and Syria?
SOEs are business entities or companies in which domestic or foreign governments own a majority or a minority share. These companies can be owned by the central government or by a regional or municipal governing body. SOEs can be in any industry, including public utilities such as water, transportation, and electric power; communications; financial services, such as banks and insurance companies; and social services such as educational institutions, health services, and hospitals.
Globally, including in non-conflict environments, SOEs have played a pivotal role in the economies of developing and developed nations. These enterprises have become a staple ingredient at both the state and municipality levels in many western governments’ economic plans to provide services, employment, and profits, with a large number of them having an international presence in the global economy. According to a study published by the OECD, it found that of the Fortune 2000 companies in 2010-2011, 204 were majority-owned SOEs with presence across 37 countries.
Opponents of a strong presence of SOEs base their argument on the idea that SOEs enjoy an unfair competitive advantage over the private sector, and that government involvement, with its high levels of regulation and bureaucracy, can have damaging effects on innovation and the human entrepreneurial spirit. Historically, though, and in my opinion, free-market philosophy has never provided full economic and social protection from failures. History’s lessons from the last century give us clear examples, from the 1933 U.S. market collapse to the 1980s recession and to the recent financial market collapse of 2007. Globally, we have lessons from the Latin America crisis of the early 1980s to the Asian financial crisis of 1998, and to the brewing European and American recessions, which experts predict as sure to happen.
SOEs in a post-conflict environment, if managed properly, can help bring economic and political stability to a region by increasing economic production, addressing unemployment issues and politically strengthening the government’s image and perception of being in control. After years of war and destruction, central and local governments must find ways to rebuild socially, politically, and most importantly, economically. Without creating new jobs for old combatants and for the general population, political stability can be hard to sustain. Historically, and particularly in post-conflict environments, the private sector is rarely ready to take on the challenge and responsibility of creating jobs and rebuilding an economy. In addition, and in my opinion, foreign investors’ appetite for war-torn countries is usually low, at least for the first 5 years of improved security.
Unfortunately, in post-conflict environments, SOEs are often infected with the same elements that led to the original conflict, including racial and regional sensitivities, corruption, income inequality and lack of fair opportunity for all. In third world countries, SOEs are a haven for the corrupt and under-skilled at all levels of operations and management. Therefore, it is no surprise that the struggle for their control becomes a basis for continuing conflict.
In the Middle East and Africa, voices of privatization have been the loudest particularly in post-conflict environments such as Iraq, Libya, Afghanistan, and Liberia. Some privatization efforts have met with success. Others though, where the push for privatization came at the expense of a strong government role in building State-owned Enterprises meant to fill the void left by the private sector, came short.
For example, at the time of the fall of Saddam’s regime in Iraq, the government had over 500 SOEs that employed about 500,000 of the 4,000,000 in the workforce. After the fall, the Provisional Authority pushed for a free market economy and for full privatization. This decision was based on ideological thoughts far from the practicality of the environment. The approach did not take into account the need to immediately provide employment opportunities to young Iraqis, which the private sector was too weak to create. The immediate dismantling of the existing government and commercial institutions had a crippling effect on the country and on society. In fact, its effects are still seen today, 15 years after the U.S.-led invasion. Because the young were left with no means of providing for their families, sectarian groups discovered an opportunity to recruit by filling this need. The Provisional Authority in Iraq failed to understand that immediate economic growth restoration meant a strong chance to sustainable peace, and SOEs were a solution they ignored.
The fact remains, though, that because of their size and presence, these enterprises can be a stepping stone on the long road to peace, stability, and economic and political recovery. Successful operation and management of SOEs can bring the needed security and stability necessary for foreign investors to be willing to inject capital to help the private sector grow. During the early stages of post-conflict, SOEs can be the foundation for local and foreign investors to build and grow on.
The importance of SOEs to bringing political stability in post-conflict states was best summarized in a report by Neil Efird, a former UNMIK (United Nations Mission in Kosovo) official, who wrote: “SOEs offer opportunities for advancing the political strategy behind post-conflict stabilization and reconstruction, opportunities poorly understood by political strategists and tacticians. Getting SOEs working right offers immediate, tangible benefits to local populations whose support is essential for earning trust and credibility… because in post-conflict situations, local populations are traumatized, so providing concrete improvements to daily life that they can see gives arms and legs to go along with hearts and minds.”
According to that same report, a first step in building and strengthening these SOEs is to make an assessment of the physical and financial damage suffered in order to determine which enterprises can be saved and at what cost. A full study of the market, both domestically and internationally, can help shape a product’s focus on commercial operations. Strong governance and transparency are key to success. Depoliticizing the workforce and management and, if needed, the hiring of a foreign manager to lead the first phase of restructuring is highly recommended. A focus on enterprises that provide essential services to the public, such as electric power, telecommunications, transportation, and basic infrastructure-based companies should be a priority.
At some point, Libya, Syria, and Yemen will need to put together a comprehensive program through SOEs, complete with short- and long-term plans to provide immediate employment for returning refugees, old combatants and thousands of displaced families. The governments need to be careful not to destroy these enterprises with over-employment, or through weak or opportunist management.
The success of these SOEs in a post-conflict environment will depend highly on governments’ leadership and the restructuring approaches they adopt. According to PwC, they must have a formula that includes a vision and clear objectives for each enterprise. Internal structures must be based on innovation, protection of the environment, and human capital growth. A focus on transparency and strong governance with financial discipline should be a priority. Executive management should be given clear mandates, tasks, and roles. External auditing mechanisms should be implemented. If managed properly with the help of international organizations such as the OECD, World Bank, and the IMF, these enterprises can achieve the level of stability needed in a post-conflict environment.
So, what lessons can we learn from all this? Obviously, capitalism and free-market economies cannot work alone without government protection, as seen in 2008 when the U.S. government had to spend $49.5 billion for a 61% stake in the automaker General Motors to save it from bankruptcy and avoid liquidation. According to the Center for Automotive Research, this move saved over 2.63 million jobs in the U.S. economy in 2009. On the other hand, SOEs cannot undertake the responsibility of building an economy without the private sector’s flexibility and innovation. In my opinion, a strong government presence in key industries within the economy is needed during both stable and post-conflict times to safeguard against market failures. This is where SOEs can come into play by creating a balance between public and private sectors.